Bavarian Blockade A Tale of Two Taxes

Negotiations trying to reform Germany’s system of redistributing tax revenues from wealthy to poorer states are deadlocked because of opposition from rich Bavaria.
Horst Seehofer (l) and Wolfgang Schaüble don't see eye to eye.

Two weeks ago, it seemed as if movement was returning to deadlocked negotiations between Germany’s states and the federal government regarding the redistribution of tax revenues. But a setback occurred recently at a nighttime meeting in the chancellery in Berlin.

Horst Seehofer, the state premier of wealthy Bavaria, rejected a fundamental part of a proposal by Wolfgang Schäuble, Germany’s federal finance minister.

He opposed simplifying the fiscal equalization scheme between the federal government and the states known as the Länderfinanzausgleich. Mr. Seehofer leads the conservative Christian Social Union (CSU), which is the Bavarian sister party to Mr. Schäuble’s Christian Democratic Union (CDU).

Mr. Schäuble failed a few weeks ago with the idea of integrating the so-called solidarity surcharge into the basic income tax and thereby passing on €10 billion in tax revenue to the states each year. That proposal also went down in flames in talks between the parties in Chancellor Angela Merkel’s right-left coalition, which is made up of the CDU, the CSU and the center-left Social Democratic Party (SPD). Again, Mr. Seehofer was the naysayer.

Achieving reform in financial relations between the federal government and the states is one of Mr. Schäuble’s most important projects in this legislative period. But opposition arises repeatedly in his own camp. If it is not Mr. Seehofer who torpedoes Mr. Schäuble's proposals, criticism comes from one of the CDU state premiers.

The solidarity surcharge was introduced after Germany’s reunification to support the economic recovery of the formerly communist East Germany. After the solidarity-surcharge integration plan was rejected in March, Mr. Schäuble proposed turning €7 billion from the federal government's value-added-tax revenues over to the states and radically simplifying the system.

There is still a fight between poor and rich states, the East against the West, the North against the South — and Bavaria against all.

Tax revenues currently are distributed twice between the German states: once with the VAT, and again in the actual equalization scheme between the states and the federal government. About €8 billion is transferred each time.

But the result is that in the first step with VAT revenues North Rhine-Westphalia, Rhineland-Palatinate and the city-state of Berlin pay into the pot, only to become recipients in the second step after the Länderfinanzausgleich.

If both steps were combined, then both North Rhine-Westphalia and Rhineland-Palatinate would become donor states just like Bavaria, Baden-Württemberg, Hesse and Hamburg currently are. With 65 percent, the donor states would represent a majority of Germany's population.

“If we combine the large equalization systems, then movement will come to the front lines with regard to the fact that only a few donor states are paying for several receiving states,” said Hesse's finance minister, Thomas Schäfer (CDU), a supporter of Mr. Schäuble.

There is still a fight between poor and rich states, the East against the West, the North against the South — and Bavaria against all. Mr. Seehofer seems more concerned with symbolism than with money. He opposed integrating the solidarity surcharge into the basic income tax because that would mean an increase in the rates of taxation — but not the actual amount of taxes to be paid.

If only one step in the equalization scheme existed, Bavaria would be obligated to transfer the same sum to other states as currently in the two-step system. Up to now, the first step involving the VAT has not entered into widespread public discussion.

The second step, on the other hand, is very much in the public eye. There would be relief for all states, including Bavaria, from the additional billions promised by Mr. Schäuble.

German Tax Solidarity in Two Easy Steps-01

The finance minister for Berlin, Matthias Kollatz-Ahnen, told Handelsblatt that behind the problem with Bavaria lies “a false appraisal of the situation of the donor states.”

Mr. Kollatz-Ahnen, a member of the Social Democratic Party, said Germany's states are not developing at the same rate. The eastern states lag behind in economic growth, whereas tax revenues increase in Bavaria faster than in the rest of the country. In both compensation rounds combined, Bavaria accordingly had to hand over €6.1 billion in 2013 and €6.8 billion in 2014.

“The only possibility to avoid a rise in Bavaria's contribution would be to distribute tax revenues per inhabitant from the very beginning," Mr. Kollatz-Ahnen said. Only that would lower the subsequent need for redistribution among the states. “But 40 years ago, [CSU leader] Franz Josef Strauss was unable to push through this proposal,” he said.

Back then, however, Bavaria was still a recipient state. Over the decades, a distribution of tax revenues based on each state’s population has repeatedly failed due to opposition from states with especially high revenues from corporate taxes—and today, that means Bavaria above all.


Donata Riedel, Jan Hildebrand and Hans Christian Müller-Dröge are reporters for Handelsblatt. To contact them: [email protected], [email protected] and [email protected]